What may happen with mortgage rates during the spring homebuying season? See our latest Two-Month Forecast for Mortgage Rates.

What may happen with mortgage rates during the spring homebuying season? See our latest Two-Month Forecast for Mortgage Rates.

Doubt Creeping In?

New Two-Month Rate Forecast at HSH.com

April 5, 2024 -- In regard to economic growth, inflation and the labor markets, very little has changed in recent months, but the perception of how the Fed will manipulate monetary policy (and how soon) seems to have changed a bit of late. Officially, the Fed is on track for perhaps three cuts in short-term interest rates this year; investors and forecasters have focused in on June as the likely first change for the federal funds rate.

All this presupposes that the trend in inflation the Fed wants to see comes to pass. Even with a couple of firmer inflation readings to start the year, Fed Chair Powell again noted this week that "The recent data do not materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down to 2% on a sometimes bumpy path."

That said, investors seem somewhat less convinced of late that June will be the starting point. At the beginning of this week, federal funds futures markets placed about 63% odds of this happening; these odds rose to about an 80% probability after the Fed Chair spoke in Wednesday. However, the strong spate of new hiring detailed in Friday's employment report for March erased a fair bit of that rate-cut optimism, and the odds for a June cut are now reckoned to be just above that of a coin flip.

During the press conference that followed the March Fed meeting, Chair Powell was asked if strong hiring in and of itself would be a reason to hold off on rate cuts. He replied "No, not all by itself. [...] in and of itself, strong job growth is not a reason, you know, for us to be concerned about inflation." At least at the moment, investors appear to be divided on that opinion.

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The Job Openings and Labor Turnover Survey (JOLTS) didn't find a whole lot of change to labor trends in February. There were 8.756 million available positions, up just slightly from January's downwardly-revised 8.478 million spots, and both these figures are part of a slow and gentle downtrend that has been in place for months. The report noted that in February, hiring firmed up a little, as did separations, while the voluntary "quits" rate remained essentially flat. At least by this measure, the labor market continues to slowly and gently loosen, and fewer workers changing positions suggests that wage trends are flattening out, too.

March's employment report surprised to the upside, as 303,000 hires took place during the month; revisions to February (-5K) and January (+27K) were modest. The unemployment rate settled back a tick to 3.8% for March, but has been in a range between 3.7% and 3.9% since last August, so there was no real change there. More potential workers joined the fray last month, as the size of the labor force expanded by 469,000 people. This helped lift the labor force participation rate back up to 62.7%, which is close to its post-pandemic high but still fairly below the levels seen before coronavirus became a thing.

While hiring was strong, wage growth did not accelerate much, rising by just 0.3% and moving again in an inflation-friendly direction. The 4.1% year-over-year growth in wages for March is one that is back in line with the larger trend and shouldn't add any additional concern about wage-fueled price pressures. Even though the current figure remains above the level the Fed feels is consistent with core PCE inflation returning to 2%, strong worker productivity over the last few quarters is providing at least some offset for these still-sizable wage gains.

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The number of announced layoffs as tracked by the outplacement firm of Challenger, Gray and Christmas was 90,309 in March. Like 2023, the first three months of the year has seen relatively elevated job cuts, averaging 90,138 over the January-to-March period this year, very similar to 2023's 85,751 over the same three month stretch. About 40% of the job losses for March were military or public-sector positions, but tech, retail and the education sector also accounted for another sizable portion. That said, it still appears as though folks aren't having great trouble locating new and suitable employment, since the weekly tally of initial claims for unemployment benefits continues to bump along at a low level. However, there was a bit of an increase in claims in the week ending March 30; while the 221,000 new requests for assistance weren't much different than recent levels, they were nonetheless the highest number since January 27.

Two broad measures of the economy both came in on the positive side of the ledger for March, the first time that's happened for a while. One sector improved while the other saw activity settle back, but both are contributing to the whole at the moment. The Institute for Supply Management's barometer of manufacturing activity posted a value of 50.3 for March, an increase of 2.5 points and the highest this figure has been since September 2022. New orders moved over the breakeven line of 50, rising by 3 points to 51.4, and there have been two positives seen in this component over the last three months. While mildly improved, manufacturing employment conditions remain soggy, as a 1.5 point increase for this piece still left it at a below-par 47.4 for March. The "prices paid" index here may have contributed to investor unease this week, since this measure of (primarily) goods inflation rose 3.3 points to 55.8, still only a moderate level but also the highest point in about two years.

An overall measure of factory orders for February posted a 1.4% increase and is likely the source of the improved manufacturing outlook in March. Orders for non-durable goods rose by 1.6%, erasing January's 0.8% decline, while those for durable goods expanded by 1.3%, partially offsetting the prior month's sharp drop. As well, the so-called core measure of orders (a proxy for business investment, as it doesn't include aircraft or military-related orders) sported a solid 0.7% increase for the month, perking back up after a couple of back-to-back declines.

The larger service-sector side of the economy has been carrying much of the economic load for some time but has been in a largely moderating trend since mid-late 2023, and certainly easing since the calendar turned 2024. The ISM's latest service-business gauge came in at a reading of 51.4 for March; this was a decline of 1.2 points relative to February, and one that points to a non-manufacturing sector that is only rumbling along at a modest-to-moderate level. New orders remained solid at 54.4, while employment edged higher by a half-point to 48.5, a sixth month where this component has been either just above or a little below the breakeven level of 50. This pattern is suggestive of a softer overall hiring trend, albeit one that has yet to be seen in other data. The inflation measure here was more favorable in March, as the prices paid component posted a decline of 5.2 points to land at a moderate 53.4 for the month. Quietly, this latest prices paid figure was the lowest since the pandemic was declared four years ago; unlike manufacturing, where goods and commodity prices are edging higher, service-business price inputs continue to cool, and that should help the Fed find the confidence it needs to consider trimming rates.

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With yet three weeks to go until the initial official figure is released, the Federal Reserve Bank of Atlanta's GDPNow model pegs first quarter growth at a 2.5% rate. There's still a bit of data yet to be incorporated into the model but it is very likely that GDP growth has moderated appreciably from the levels seen over the last couple of quarters. Moderating growth should help allow inflation to continue retreating, although a 2.5% clip for GDP is arguably too strong to allow much by way of immediate disinflation.

Outlays for construction projects decreased by 0.3% in February. Keeping the headline figure from being even more negative was a 0.7% increase in spending on residential projects as homebuilding pushed higher again. Non-residential spending flagged by 0.9% in February, and public-works projects also posted a decline, falling by 1.2% for the month. Both of these latter components were in a two-month skid to start 2024. Collectively, and despite the monthly slide for February, spending for construction is 10.7% higher this February than last, so it's not as though activity has come to a halt.

The imbalance of trade between the U.S. and its trading partners widened a little bit in February, expanding by $1.3 billion to $68.8 billion for the month. The larger gap saw the dollar value of exports rise by $5.8 billion, while that for imports rose by $7.1 billion. That trade flows expanded on both ends suggests that not only is the U.S. economy expanding but that those of our trading partners are also expanding lately, at least in the aggregate.

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Outstanding balances on consumer debt rose by $14.4 billion in February. During the month, consumers pulled out their credit cards more often, as balances on revolving credit accounts rose by $11.3 billion. Installment-type borrowing (typically used for large purchases, education loans, personal loans and the like) remains a bit of a mystery, as it continues to expand at an unusually slow pace, with balances here rising by just $2.9 billion in February. This component has been pretty soft since the Biden administration began canceling student loan debt, and at least through last month, some $143.6 billion have been wiped off of non-revolving education accounts, so perhaps the meager rate of expansion seen here is indicative of actual new consumer demand for goods and services.

Sales of new vehicles would be one place where installment borrowing should show, and they have been burbling along at a modest rate for some time. In February, the Bureau of Economic Analysis reported that new cars and light trucks sold at an annualized rate of 15.5 million, a figure little changed from the recent trend. High vehicle costs and tighter financing conditions are throttling sales to some degree, but anecdotal evidence suggests that car dealer inventories continue to improve and financing and other sales promotions are starting to appear again, so sales seem to still have rather a bit of upside.

It would be nice if there was more upside in requests for mortgage loans, but that's just not the case at the moment. The Mortgage Bankers Association reported a 0.6% decline in applications for mortgages in the week ending June 29. While a third consecutive decline, applications for funds to purchase homes slipped by just 0.1%, while those for loans to refinance existing mortgages dropped back by 1.6%, also part of a three-week slide. It'll take more than just lower mortgage rates to see mortgage activity kick meaningfully higher, but that would be a good place to start.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Mar 29Mar 01Mar 31
6-Mo. TCM 5.37% 5.31% 4.91%
1-Yr. TCM 5.01% 5.00% 4.58%
3-Yr. TCM 4.38% 4.43% 3.84%
10-Yr. TCM 4.22% 4.26% 3.54%
Federal Cost
of Funds
3.889% 3.876% 3.139%
30-day SOFR (daily value) 5.32240% 5.31998% 4.55973%
Moving Treasury Average
5.114% 5.088% 3.744%
Freddie Mac
30-yr FRM
6.79% 6.88% 6.28%
Historical ARM Index Data

With what seems to be a little more unease in the possible direction for monetary policy overspreading the financial markets in the last week or so, interest rates have risen. The influential yield on the 10-year Treasury note has powered back up toward levels last seen in November, a time when mortgage rates were retreating from 22-year highs. At that time, the spread between the average mortgage rate and 10-year Treasury yield was considerably wider, running at about 290 basis points; recently, this has been closer to 250 basis points, so the expected uptick in mortgage rates will likely leave them at a level somewhat below where they were after Thanksgiving.

Still, mortgage rates can't escape rising from current levels next week. All indications are that a sizable bump can be expected, and likely one that lifts the average offered rate for conforming 30-year fixed-rate mortgage as reported by Freddie Mac back up to nearly the 7% mark. Rates may fall just short of the 18 basis point increase they need to get to 7% but it may be close. We'll know soon enough.

What's the outlook for mortgage rates for much of the spring homebuying season? See what we think when you take look at our latest Two-Month Forecast for mortgage rates, covering April into early June.

To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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